China’s latest inflation figures should be a cause for concern for the authorities in Beijing. The lack of consumer inflation indicates that Chinese consumers are facing deeper problems than just the property crisis. Additionally, declining producer prices show that the planners in Beijing have further distorted China’s economy.
According to the National Bureau of Statistics in Beijing, consumer prices only rose by 0.2 percent in June compared to the previous year. This is significantly lower than the expected 0.4 percent rise and even lower than May’s 0.3 percent increase. While this may be welcomed in countries struggling with inflation, it highlights the failure to stimulate consumer spending in China’s economy, which is desperately needed.
Furthermore, producer prices, also known as prices at the “factory gate,” were 0.8 percent lower in June compared to the previous year. This marks the 21st consecutive month of such declines, indicating oversupply. Chinese factories are producing more goods than the demand from both domestic and foreign markets.
The root of these problems lies in the lackluster spending habits of Chinese consumers. The economic slowdown in China has led to lower wages, and even where wages have not declined, they have failed to meet the expectations formed during the period of rapid growth. This has had the greatest impact on the middle and lower income segments of the population.
The COVID-19 pandemic and subsequent lockdowns have further eroded consumer confidence. The interruption in work and the zero-COVID policy imposed by Beijing have made Chinese workers question their earning potential and reduced their willingness to spend. Additionally, the property crisis has caused residential real estate values to decline, impacting the wealth and willingness to spend of most Chinese people who have their assets tied to their homes.
The drop in producer prices tells a more alarming story. In an attempt to boost the economy, Beijing focused on expanding manufacturing capabilities in areas like electronics, batteries, electric vehicles (EVs), and solar cells. However, the declining producer prices indicate that there is insufficient demand for this increased capacity. Moreover, Western countries have imposed tariffs on Chinese-made EVs, batteries, and solar cells, further limiting Chinese exports.
As a result, China’s exports to the EU and the United States have decreased by 10 percent and 17 percent, respectively, over the past five months. However, overall exports have risen due to increased sales to Russia, Latin America, and Southeast Asia. The sales to Russia reflect the Western embargo against Russia, leaving China as one of its few sources. The sales to Latin America and Southeast Asia are mainly shipments of parts to Chinese factories established there to bypass American and European restrictions.
Even if the American and European markets were more receptive to Chinese products, Beijing’s focus on manufacturing as a substitute for weak consumer demand would still be a mistake. International organizations like the International Monetary Fund have long advised China to shift towards a domestically driven growth model. The emphasis on manufacturing last year contradicts this advice and was poorly timed, given the changing attitudes in the United States and Europe. The decline in factory-gate prices highlights the gravity of this mistake and reveals yet another problem in China’s economy.
Overall, the lack of consumer inflation and declining producer prices in China indicate serious and fundamental economic distortions. Chinese consumers are facing challenges beyond the property crisis, while Beijing’s efforts to stimulate the economy have only worsened the situation. The need for a shift towards domestic-driven growth and a reevaluation of manufacturing strategies is evident.
